BXP, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. BXP is a REIT that conducts substantially all operations through Boston Properties Limited Partnership (BPLP). At quarter-end, BXP owned approximately 89.9% of BPLP. The portfolio included 195 properties and approximately 51.2 million net rentable square feet, primarily Class A office space in Boston, Los Angeles, New York, San Francisco and Washington, DC.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Total revenue | $654.8 million | $733.7 million | Down 10.8% |
| Lease revenue | $630.1 million | $680.2 million | Down 7.4% |
| Net income attributable to BXP common shareholders | $266.5 million | $164.3 million | Up 62.2% |
| Diluted EPS | $1.71 | $1.06 | Up 61.3% |
| BXP share of FFO attributable to common shareholders, non-GAAP | $236.9 million | $276.3 million | Down 14.2% |
| Company share of NOI, non-GAAP | $397.9 million | $433.5 million | Down 8.2% |
GAAP earnings growth was substantially affected by real estate sale gains: BXP recorded $203.8 million of gains in Q2 2020, principally from selling part of Capital Gallery, compared with $1.7 million of gains in Q2 2019. The increase in net income therefore did not reflect underlying operating growth. Total portfolio NOI was $402.4 million, down 11.4%; same-property NOI was $384.1 million, down 12.8%.
For the six months ended June 30, revenue was $1.407 billion versus $1.460 billion. Net income attributable to BXP common shareholders was $764.2 million versus $262.4 million, while company share of NOI was $850.6 million versus $878.6 million, down 3.1%. Six-month GAAP earnings also included approximately $613.9 million in real estate sale gains.
- Cash flow: Six-month operating cash flow was $554.3 million, down from $565.6 million. Investing cash outflow was $120.5 million; financing cash inflow was $866.0 million. Cash and cash equivalents were $1.691 billion at June 30, with an additional $300.6 million in escrows.
- Debt and leverage: Consolidated debt was approximately $13.05 billion, including $9.63 billion of unsecured senior notes, $2.92 billion of mortgage debt and $499.2 million under the term loan. Approximately 96% was fixed-rate; weighted-average GAAP interest rate was 3.66% and weighted-average maturity was 5.9 years. Consolidated debt to market capitalization was 45.16% (a market-price-dependent measure).
- Liquidity: Management reported approximately $1.4 billion of cash and cash equivalents and $250 million held in escrow for 1031 exchanges as of August 3, 2020, plus approximately $1.5 billion available under the revolving facility. The $850 million of senior notes due May 2021 was identified as a key near-term funding need. BPLP was in compliance with stated debt covenants at June 30.
- Dividend: The quarterly common dividend was $0.98 per share, unchanged from the prior quarter; the board said it would continue to assess the dividend in light of taxable income, liquidity and COVID-19 conditions.
Material changes and operating trends
- COVID-19-related rent collection was 96% across tenants in Q2, including 99% for office tenants and 45% for retail tenants. Retail represented approximately 4% of cash rent billings.
- Management reported approximately $41 million of Q2 write-offs on its share basis; about 95% related to retail tenants. Consolidated write-offs included $35.9 million of accrued rent and $18.0 million of accounts receivable in Q2.
- Q2 cash rent abatements and deferrals were approximately $16.6 million on management’s share basis. Lease modifications covered approximately 2.4 million square feet in the same-property portfolio, with many modifications extending lease terms.
- Overall in-service office and retail occupancy was 92.0% at June 30, down 90 basis points from March 31. The Boston Marriott Cambridge hotel remained closed after March and operated at a Q2 loss of approximately $1.9 million.
- Parking and other revenue fell to $13.9 million in Q2 from $26.3 million a year earlier, mainly reflecting reduced parking demand. Q2 lease revenue also reflected tenant credit write-offs and lower variable lease payments.
- Development activity included approximately 5.0 million square feet of active developments and redevelopments, 74% pre-leased as of August 3. Construction work stoppages earlier in Q2 had resumed, and management reported projects on schedule and within budget at that time.
Outlook, risks and unusual items
Management did not provide quantitative earnings or revenue guidance in the supplied filing text. It expected 2020 revenue to be adversely affected by retail tenant stress, lower parking and hotel revenue, slower new leasing and potential further receivable and accrued-rent write-offs. New leasing activity had slowed, although the company signed approximately 942,000 square feet of leases in Q2, including a 400,000-square-foot, 12-year Microsoft lease in Reston.
Management stated it believed liquidity was sufficient for current development commitments, the 2021 debt maturity and potential investment opportunities, while emphasizing that the full financial and operating effects of COVID-19 were uncertain. Principal risks include tenant defaults and bankruptcies, rent concessions, prolonged remote work reducing office demand, impaired property or joint-venture values, construction delays and cost increases, capital-market access, debt covenant compliance, and uncertainty over pandemic-related insurance coverage.
Notable transactions included the $1.25 billion issuance of 3.25% senior notes due 2031, the sale of New Dominion Technology Park for $256 million, the sale of part of Capital Gallery for approximately $253.7 million, and the contribution of Gateway Commons properties to an unconsolidated joint venture. Platform 16 construction was paused after site preparation pending greater clarity on COVID-19’s economic effects. The filing reported no material change to previously disclosed risk factors, apart from the additional COVID-19 discussion.
Investor verification points
- Separate recurring property operations from large gains on asset sales when assessing Q2 and year-to-date GAAP earnings.
- Track retail tenant collections, additional rent and receivable write-offs, concessions, lease amendments and subsequent tenant bankruptcies.
- Monitor office occupancy, leasing velocity, renewal economics and whether the reported 92.0% portfolio occupancy changes.
- Confirm liquidity and refinancing plans for the $850 million May 2021 maturity, while considering joint-venture debt maturities and guarantees.
- Review development budgets, leasing and delivery milestones, including projects paused or exposed to construction and demand uncertainty.
- Assess the sustainability of the $0.98 quarterly dividend against cash generation, REIT distribution requirements and changing business conditions.